Morning Report: Pending Home Sales fall

Vital Statistics:


  Last Change
S&P futures 3720 -4.3
Oil (WTI) 47.92 -0.44
10 year government bond yield   0.92%
30 year fixed rate mortgage   2.78%

Stocks are flattish as we end out 2020. Bonds and MBS are flat as well.


Pending Home Sales fell 2.6% in November, according to NAR. Year-over-year contract signings were up.

“The latest monthly decline is largely due to the shortage of inventory and fast-rising home prices,” said Lawrence Yun, NAR’s chief economist. “It is important to keep in mind that the current sales and prices are far stronger than a year ago.”

“The market is incredibly swift this winter with the listed homes going under contract on average at less than a month due to a backlog of buyers wanting to take advantage of record-low mortgage rates,” Yun said.


For 2021, NAR predicts existing home sales will rise 10% and new home sales will rise 20%. The mortgage rate will rise slightly from 2.7% to 3%.


Initial Jobless Claims fell to 787k last week.


Other than that, have a Happy New Year and see you on the other side.

Morning Report: Doug Kass’s 15 surprises for 2021

Vital Statistics:


  Last Change
S&P futures 3743 15.3
Oil (WTI) 48.22 0.64
10 year government bond yield   0.95%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on no real news. Bonds and MBS are up.


Home prices rose 1.6% in October and were up 7.9% on a year-over-year basis. With mortgage rates continuing to hit new lows, and a complete dearth of inventory, home price appreciation should continue.


Doug Kass released his 15 surprises for 2021. Doug’s surprises are always an entertaining read. Note that by definition, a “surprise” is not a high-probability event, it is like picking an upset in your NCAA bracket. Some of more interesting predictions revolve around inflation:

Surprise #5 Bottlenecks Multiply and Inflation Surges –There are bottlenecks everywhere in 2021 and inflation in places beyond financial assets. As the economy reopens, there are shortages of almost everything. Commodities boom, but so do service prices. It seems that prices of everything from shipping to manicures are on the rise. The infrastructure bill sends construction material prices through the proverbial roof. Pent up savings are unleashed in robust consumer demand. Concerts, sporting events reopen with limited capacity and tickets are in hot demand. Residential real estate (single and multi family) soar in price, as people put stimulus, the recovery and stock market winnings into real estate. By mid-year, even the badly manipulated CPI is running up +4%.

Surprise #6 Inflation and Interest Rates Rip Higher Leading to A Valuation Reset (Lower) For Equities in 2021… At first, the bond market reacts “normally” to rising inflation. The 10 year yield breaks 2% (to the upside). The stock market has a late spring/early summer wobble in response to rising rates and the possibility that target inflation will force higher rates. A mid-year Treasury auction goes poorly. The Federal Reserve, faced with the dilemma of choosing between a lower stock market and higher inflation, chooses to accept higher inflation. The Fed announces a cap on the 10 year yield at 1.5% and expresses its willingness to do whatever it takes to enforce it. In effect, the Fed becomes the Treasury buyer of first resort. This sends stocks, commodities and most everything briefly higher (towards the upper end of the 3600-3800 S&P trading range) – except the dollar, which falls 10%-15%. Though temporarily ignored by infinite liquidity and easing financial conditions at all costs, it grows clear that Covid-19 spurred a dangerous leveraging up in the global economy that has been almost constantly in place since The Great Decession of 2008-09. Higher inflation and interest rates bring the “bond vigilantes” out of their long hibernation. Stocks fall by -15% over the last six months of the year as price earnings multiples contract in the face of the highest level of corporate defaults in over a decade (led by companies in the retail space and others that were already struggling prior to the virus). Credit spreads (now at record lows), widen dramatically, the CLO market collapses and private equity companies are among the worst market performers of the year.

Doug’s comments about shortages touches on what has been missing from the whole inflation puzzle. Market prognosticators have been wrong about inflation for decades because they focus solely on the monetary aspect. Inflation is too much money chasing too few goods. The “too few goods” piece of the puzzle has been missing, since China has been producing cheap goods for decades. “Too much money” is a necessary, but not sufficient, condition for inflation.

One of the “tells” for higher inflation is higher capacity utilization. This is an indicator that factories are maxed out, and increasing demand will push up prices, not output. Take a look at capacity utilization over the past 50 years:

Compare capacity utilization rates in the 1970s versus today. If demand increases, there is plenty of slack in the system to meet it. Obviously COVID is adding some constraints, but that is a temporary phenomenon.

I do think Doug’s point about the Fed capping the Treasury yield is interesting, although I think with all of the deflationary forces around the world: Japan, Europe, it will be hard to create an inflationary cauldron in the US while the rest of the world struggles with deflation.


Morning Report: Stimulus Bill Passes

Vital Statistics:


  Last Change
S&P futures 3721 25.3
Oil (WTI) 48.21 0.24
10 year government bond yield   0.96%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning after Trump signed the COVID-19 relief bill. Bonds and MBS are down.


The stimulus bill includes $600 checks for most Americans, and also includes a continuing resolution to keep the government open.


This should be a quiet week between Christmas and New Years. Markets will be closed on Friday, and the bond market closes early on Thursday. There doesn’t appear to be any market-moving data either, although we will get Case Shiller and Pending Home Sales.


While Treasury yields have been inching up, mortgage rates continue to hit new lows. This has been driven primarily by Fed MBS purchases and increased competitive behavior from originators. While existing homeowners are benefiting from lower rates, the first time homebuyer is struggling to find anything affordable as inventory is stuck at record lows.


Unintended consequence of Fed policy: stock market margin debt is at an all-time high. Today’s WSJ has a story of a guy who sold his house and spent some of the proceeds to buy Tesla call options. IMO the Fed has painted itself into a corner here, and I suspect returning to any sense of pre-COVID normalcy will be a rough road indeed. Meanwhile, Bitcoin continues to soar, and home prices are rising at a double digit rate.



Morning Report: Home Prices rise

Vital Statistics:


  Last Change
S&P futures 3691 15.3
Oil (WTI) 47.41 0.24
10 year government bond yield   0.95%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on no real news. Bonds and MBS are down small.


President Trump has indicated dissatisfaction with the stimulus bill passed by Congress. He wants higher payments and much of the extraneous stuff pulled out. He didn’t expressly say whether he would veto the bill as-is. There are all sorts of things in there that have nothing to do with stimulus (new penalties for illegal streaming, funds to Pakistan for gender studies, etc), and my guess is that stuff is going to have to go.


Mortgage applications increased by 1% last week as purchases fell 5% and refis rose 4%. “The 30-year fixed rate – at 2.86 percent – is a full percentage point below a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Last week’s increase in refinance applications was driven by FHA and VA activity, while conventional refinances saw a slight decline. Overall refinance activity was 124 percent higher than in 2019, as borrowers continue to seek lower monthly payments or different loan terms.” Despite the drop in purchases they are still up 26% on a YOY basis.


Personal incomes fell 1.1% in November, and personal spending fell 0.4%. Inflation as measured by the personal consumption index came in at 0% on a MOM basis and 1.1% on a YOY basis. Inflation is way below where the Fed wants to see it, and unless we see a dramatic shift in these numbers, the Fed will keep the pedal to the metal with asset purchases and 0% interest rates.


Home Prices rose 1.5% MOM and 10.2% YOY according to the FHFA House Price Index. “U.S. house prices rose for the fifth straight month since states re-opened their local economies,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “The 12-month gain of 10.2 percent in October is the highest annual appreciation observed since the 2004-2005 period. Extremely low mortgage rates and a limited supply of homes for sale continue to propel price gains. The data do not yet reflect renewals of some local and state COVID-19 restrictions.”


New Home Sales fell 11% MOM to 841,000. This is still up 21% on a YOY basis. The median sales price of new houses sold in November 2020 was $335,300. The average sales price was $390,100. I suspect that new home sales will be the big surprise of 2021.


In other economic news, durable goods rose 0.9%, while initial jobless claims fell to 800k last week. Consumer sentiment fell.

Morning Report: Zillow forecasts that 2021 could be the best year for housing since 1983

Vital Statistics:


  Last Change
S&P futures 3690 5.3
Oil (WTI) 47.21 -0.74
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are flattish this morning on no real news. Bonds and MBS are flat.


The House and Senate passed a stimulus bill and a funding bill. It allows for $600 checks to be sent to most Americans.


The third revision to Q3 GDP came in at 33.4%. Personal consumption expenditures rose 41%. These were both upside revisions.


Corporate profits rose 10.3% in the third quarter, which was a downward revision.


The number of mortgages in forbearance was unchanged at 5.49% last week, according to the MBA. “The share of loans in forbearance has stayed fairly level since early November, often with small decreases in the GSE loan share and increases for Ginnie Mae loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “That was the case last week. Additionally, forbearance requests from Ginnie Mae borrowers reached the highest level since the week ending June 14. Additional restrictions on businesses and rising COVID-19 cases are causing a renewed increase in layoffs and other signs of slowing economic activity. These troubling trends will likely result in more homeowners seeking relief.”


The spring selling season should be the biggest in 40 years, according to Zillow estimates. They expect that there will be a rush for buyers to get into the market before rates rise in the second half of 2021. I suspect that there is a lot of pent-up demand and supply from last spring, where sellers pulled homes off the market because they were worried about strangers entering their homes. Zillow is looking for home sales to hit 6.9 million units, the highest number since 1983.


Existing home sales fell 2.5% MOM to an annualized rate of 6.69 million units. This is still up 26% compared to a year ago. The median home price rose 15% to $310,600. Total for-sale inventory fell to 2.3 months worth, a record low. Homes were on the market for 21 days on average. First time homebuyers accounted for 32% of all sales. Historically that number has been closer to 40%. While low mortgage rates are helping improve affordability, rapid price increases are having the opposite effect.

Morning Report: Stimulus deal

Vital Statistics:


  Last Change
S&P futures 3648 -55.3
Oil (WTI) 47.17 -2.34
10 year government bond yield   0.91%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning on news of a second strain of COVID in the UK. Bonds and MBS are up.


Congress came to an agreement on a $900 billion stimulus package, which will send $600 checks to people, and an extra $300 per week in unemployment benefits. Here is a chart to show where the money is going

There is no aid to state and local governments, which the Democrats desperately want. Chuck Schumer is already saying that there will be another stimulus bill when Biden takes office. Much will depend on the special election in Georgia which will determine which party controls the Senate.


The week ahead should be quiet as we head into the holidays. Markets will close early on Thursday and be closed all day on Friday. We will get a bit of housing data with existing home sales, new home sales, and the FHFA House Price Index.


United Wholesale, which is going public via a SPAC, pushed its IPO to January.


Morning Report: NYC revenues fall $1.2 billion

Vital Statistics:


  Last Change
S&P futures 3718 5.3
Oil (WTI) 48.77 0.34
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are flattish as investors hope for some sort of stimulus package. Bonds and MBS are down.


Congress is working on stimulus bill and also a stopgap measure to keep the government funded. There is a tiny possibility that funding could run out over the weekend, but nothing prolonged is envisioned.


Despite the increase in the 10 year bond yield, mortgage rates are at record lows. “Mortgage rate dynamics over the past several months have been less dependent on economic data and more on policy-related matters — both fiscal and monetary — as well as epidemiological developments,” said Matthew Speakman, a Zillow economist. “A new spending package may place some upward pressure on mortgage rates, particularly if the package contains more than has been reportedly debated. Investors have expected the spending package for a while now, meaning it’s likely that most of their reaction has already been priced in. Overall, mortgage rates remain very low and are unlikely to shift unless a blockbuster spending package is passed before the end of the year.”


Falling real estate prices have dented NYC revenues by 1.2 billion. Sales of commercial and resi properties have fallen 49% compared to last year. This has translated into a 42% decrease in tax revenue for the City. The next shoe to drop should be office vacancies as big financial firms like JP Morgan and Goldman have talked about moving more jobs out of the City. Manhattan apartment prices are at 10 year lows, apparently. I have to imaging the apartments in more marginal areas of Brooklyn and Queens are getting absolutely hammered.

Morning Report: Fed Day

Vital Statistics:


  Last Change
S&P futures 3686 2.3
Oil (WTI) 47.57 0.24
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are flat as we await the Fed decision. Bonds and MBS are down small.


The Fed announcement is expected to announce its decision at 2:00 pm this afternoon. The market will focus most closely on the economic forecasts and any changes in Treasury / MBS purchases.


Retail sales fell 1.1% in November, which was well below expectations. Ex vehicles and gasoline, they fell 0.8%.


Mortgage applications increased 1.1% last week as mortgage rates continued to fall. Purchases increased 2%, while refis rose 1%. “U.S. Treasury rates stayed low last week, in part due to uncertainty over the prospects of additional pandemic-related government stimulus, as well as concerns about the continued rise in COVID-19 cases across the country. Mortgage rates as a result fell to another survey low, with the 30-year fixed mortgage rate dropping five basis points to 2.85 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Homeowners once again acted on the decline in rates, with refinance activity rising for the second straight week and up 105 percent from a year ago.”


14.5 million people will leave the cities for the suburbs, according to an analysis by RedFin. They also anticipate that many will move to cheaper cities as well, which will benefit places like Buffalo, Cleveland, and Pittsburgh. 2021 should see a massive relocation in general. Second, they anticipate the homeownership rate will hit 70% next year, which will be the highest number since 2005. They also see mortgage rates staying low, with the 30 year fixed rate mortgage finishing the year around 3%.


The NAHB Homebuilder Index slipped in December, with the index falling to 86 from recent record highs. If the Redfin study is correct, housing starts will be the highest since 2006 next year.

Morning Report: Forbearances fall

Vital Statistics:


  Last Change
S&P futures 3666 28.3
Oil (WTI) 47.27 0.44
10 year government bond yield   0.91%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning after the FDA said that Moderna’s vaccine is highly effective. Bonds and MBS are flattish.


The Fed begins its two day FOMC meeting today. The decision will be announced tomorrow afternoon.


In other economic news, industrial production rose 0.4% last month while manufacturing production rose 0.8%. Capacity utilization rose to 73.3%.


The fate of the GSEs will likely be left up to Biden, according to Steve Mnuchin. The idea of privatizing the GSEs during the lame duck session was always more of a fantasy than reality. GSE reform will likely require legislation and DC has been kicking the can down the road due to how difficult that will be. Personal opinion: the government is more likely to reinstate the profit sweep in order to compensate the government for COVID-related losses due to forbearance than it is to let the GSEs go. There is a reason why the 30 year fixed rate mortgage exists nowhere else in the world except for the United States, and that is due to the government backstop. Maintaining that product is the first priority, which means the Fan and Fred will have to maintain some sort of explicit government guarantee.


New home mortgage applications fell 16% in November, but are up 35% compared to a year ago. “November new home sales activity, both mortgage applications and home sales, ran at a pace considerably ahead of 2019, showing the ongoing strong growth in housing demand and new residential construction,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, MBA estimates that after climbing to a new survey high in October, the seasonally adjusted pace of new home sales declined in November. Signs of a slowdown in the economic recovery likely contributed to the expected monthly decrease in activity.” 


The number of loans in forbearance fell last week by 6 basis points to 5.48% according to the MBA. “The share of loans in forbearance decreased in the first week of December; however, more borrowers sought relief, with new forbearance requests reaching their highest level since the week ending August 2, and servicer call volume hitting its highest level since the week ending April 19,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Compared to the last two months, more homeowners exiting forbearance are using a modification – a sign that they have not been able to fully get back on their feet, even if they are working again.”



Morning Report: Fed week

Vital Statistics:


  Last Change
S&P futures 3680 26.3
Oil (WTI) 46.97 0.44
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on no real news. Bonds and MBS are down.


The Fed will meet this week on Tuesday and Wednesday. No changes in interest rates are expected, however we will get a new round of economic projections and future rate forecasts. The big question will concern whether the Fed intends to increase MBS purchases. Several Fed speeches have alluded to the possibility, which has probably explained much of the disconnect between Treasuries and mortgage rates. The 10 year keeps inching upwards, while mortgage rates keep hitting record lows. I still think the US 10 year cannot continue to ignore what is happening to sovereign yields overseas and the path of least resistance will continue to be down.


Aside from the Fed meeting, we will get some housing data this week with the NAHB Housing Market index and housing starts. We will also get retail sales and industrial production this week as well.


Congress is still trying to hammer out some sort of stimulus bill. The big sticking point is aid to state and local governments.


Retention rates dropped to 18% last quarter, according to data from Black Knight.

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